The Reverse Mortgage: A Caution
It’s often referred to as the largest transfer of wealth in human history. “Baby boomers,” the post-war generation born between 1944 and 1964, are expected to transfer what Forbes has called “jaw-dropping amounts” to younger generations. Over the next 20 years, the United States alone will see a transfer of $30 trillion dollars. A 2020 Bloomberg opinion article points out that the top 1% of US households will receive 35% of all inheritances. In Canada, however, half of all Canadians expect to receive an inheritance, and 63% expect to leave one.
So how do these numbers breakdown?
- Canadians who are married, own property, and have an income of $80,000 or more are most likely to leave an inheritance.
- Only 69% of those planning to leave a legacy use a financial professional for their testamentary strategy.
- The average inheritance in Canada, according to a 2014 BMO survey, is just under $100,000.
It’s not all good news. The Office of the Superintendent of Financial Institutions (“OSFI”) is an independent agency of the Government of Canada that supervises and regulates federally regulated banks, insurers, trust and loan companies. In July of 2020, the OSFI released data showing that Canadian seniors are achieving record debt levels through reverse mortgages: $4.5 billion. An increase of $4 billion in 10 years. Reverse mortgage interest can be high. The December 2020, 5-year interest rate on a traditional mortgage was 1.69%, while the 5-year reverse mortgage rate was closer to 5%. Reverse mortgage rates compound and balloon and it’s easy to see how the collected debt could skyrocket. This is particularly so older Canadians are able to stay in their homes for longer.
So while so many younger Canadians are expecting an inheritance, and indeed that expectation is forming part of their long-term financial plans, caution and careful planning should be encouraged if that inheritance is already saddled with debt. While this blog has encouraged estate discussions between family members in the past, it’s important to make your heirs aware of any responsibilities and options for settling your reverse mortgage debt when the time comes.
Thanks for reading!
Ian Hull and Daniel Enright.
 Ian Hull also discusses the subject of the family conference in his book, Advising Families on Succession Planning – The High Price of Not Talking